You need enough life insurance to cover any financial loss that will occur when you die. Your coverage should be large enough to allow your family to carry on with minimal financial disruption after you pass away.
Experts suggest your life insurance coverage should be 10 to 15 times your income, but the actual amount will depend on your unique needs — for example, if you have a mortgage to pay or young children to raise, or if you only need enough funds to cover end-of-life expenses.
What’s the best way to calculate how much life insurance you need?
Here’s an effective method to calculate how much life insurance you need:
Add up your current and future financial obligations — such as debt, everyday household expenses, children’s tuition, and childcare.
Subtract your liquid assets — such as any savings and retirement accounts.
That’s it. The result is the amount of coverage you’ll need.
You can also use our coverage calculator, located at the top of this page.
You’ll provide a few pieces of personal information, including your age and gender.
You’ll enter some details about your household finances, such as your annual income, total debt, and savings.
That’s it — we’ll calculate your life insurance needs for you.
Once you know the amount of coverage you need, a Policygenius agent can help you secure the best policy for you at the most affordable price.
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Other ways to manually calculate how much life insurance you need
Everyone’s personal and financial needs are different, so there’s a nuance on how to best calculate how much life insurance you need. If you have unique financial considerations like debt or dependents, consider the alternative calculation methods below.
1. Multiply income by 10
One common rule of thumb is that your coverage should be roughly 10 to 15 times your annual income. So for example, if you make $100,000 per year, you likely need at least $1 million in life insurance coverage.
2. Multiply income by 10, plus $100,000 per child
If you have children, there’s a slight variation to that rule. Multiply your income by at least 10 (and up to 15), then add an extra $100,000 per child to account for each child’s education. If you have any existing assets, like 529 plans, you can subtract that amount from the total you need.
3. The DIME formula
In this method — which stands for Debts, Income, Mortgage, and Education — you tally up the following:
Outstanding debts
Your income multiplied by the number of years your family will depend on it
The amount left on your mortgage
The cost of your children’s education
Your tally of your outstanding debts, separate from your mortgage, should include co-signed debt like car loans and student loans that your co-signer would become responsible for when you die. You can also include personal debt that might be taken out of your savings, like credit card debt.
You should also factor in income growth and the number of working years you have left.
4. Shortfall calculation
In this method you start by deciding the annual income you’d like to leave your beneficiaries and multiply it by the number of years of financial support you want to provide.
Next, subtract from that amount other financial assets available to your beneficiaries in your absence, including savings, current and future gains on investment and retirement accounts, Social Security, and any salaries earned by your dependents.
The result is the shortfall you’ll need to provide for through a life insurance policy.
4 tips for getting the life insurance you need & saving money
The length and coverage amount of the policy you set up will impact your life insurance costs. That’s why it’s also important to find the right type of coverage at the most affordable rate — the cheaper your rate, the more coverage you’ll be able to afford.
These tips will help you find the right life insurance coverage for you at the best price.
1. Determine the type of life insurance you need
Do you need coverage for life or only for a set period of time or for the rest of your life? Are you considering life insurance just to provide a financial safety net to your loved ones, or are you also interested in using it as an investment tool? Your answers will determine the right type of life insurance for you — and your life insurance quote.
Term life insurance is generally the most affordable type of life insurance, only lasts for a set amount of time — usually between 10 and 30 years — and doesn’t come with any complex tax implications or restrictions. Term life is the best option for most people looking to protect their income and provide their family with a financial safety net to cover any debts — including a mortgage or any other types of personal loans.
Whole life insurance and other types of permanent life insurance are good options for high-net-worth individuals who are interested in using life insurance to diversify their investment portfolio, or people with long-term financial obligations or coverage needs, like dependents who require lifelong care. Whole life never expires and comes with a cash value that earns interest in addition to the death benefit payout. Because of that, it’s usually significantly more expensive than traditional term life policies. Whole life insurance may be a good fit for you if you’re already maximizing your contributions to a Roth IRA or a 401(k) and are seeking another investment option.
Final expense insurance is also a type of permanent life insurance, but it’s designed to only cover end-of-life costs, like funeral expenses. Coverage amounts are low — usually up to $50,000 — and premiums can be comparatively more expensive than term life’s. You usually have to be at least age 45 to qualify, but if you’re not eligible for traditional coverage due to health or age reasons, final expense can be a good option for you.
2. Buy term life for the most affordable policies
If you’re considering life insurance to cover everyday expenses and any financial obligations your family would be responsible for if you pass away, a term life policy can be an affordable coverage option for you. Term life insurance is much cheaper than whole life insurance.
For example, a healthy 30-year-old would pay $26 per month for a 20-year term life insurance policy with a $500,000 payout. The same person would have to pay around $451 per month for a whole life insurance policy with the same death benefit — over 17 times more.
Learn more about the differences between term life and whole life insurance
3. Don’t wait to buy life insurance
Life insurance gets more expensive by 4.5% to 9% every year you age because we all become riskier to insure as we become older. This means the sooner you buy life insurance, the cheaper your premiums will be.
For example, a healthy, non-smoking 25-year-old can expect to pay around $24 per month for a 20-year term life insurance policy with a $500,000 death benefit payout, according to the Policygenius Life Insurance Price Index. A healthy non-smoking 30-year-old would pay a bit more — around $26 per month — for the same coverage. But the life insurance premium for a healthy 45-year-old for the same coverage would more than double that amount — around $57 per month.
The earlier you buy life insurance, the higher your chances of locking in the lowest rates will be — potentially allowing you to afford the amount of coverage you need for less.
People also tend to get less healthy as they age. There are exceptions to this, like people who improve their height-to-weight ratio or quit smoking, but in general, the sooner you get life insurance, the better because you can get approved for coverage with your current health status.
What happens if you outlive your life insurance policy?
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4. Compare life insurance companies
Life insurance is federally regulated, so no insurer will be able to offer you any discounts. However, every life insurance company evaluates the risk factors that will determine your life insurance rate differently — including, your age, gender, lifestyle habits, and more importantly, your health.
Comparing life insurance quotes from multiple insurers is the best way to find the cheapest coverage option available to you. And the best way to compare quotes is by working with an independent broker.
Independent brokers like Policygenius are not affiliated with any insurer and sell policies from multiple companies. At Policygenius, our experts are licensed in all 50 states and can walk you through the entire life insurance buying process while offering transparent, unbiased advice.
Learn more about the history of life insurance
